Tax brackets

Another person who doesn't understand marginal taxation, we need better financial education!

You’re just getting hostile now. Pointlessly really.

I am simply bringing up the net adjusted scenarios in case you’re not aware – I’d say more than half of people entering this salary do not know any of the above and aren’t claiming their hours and tax off like they are entitled to.

We are also in this cliff edge so I’m aware of the stupidities. I am just saying it’s Mumsnet, so that’s the response you will get unfortunately.

P.S Isn’t the cap £50k or something??

Yes.... I'm aware of how tax relief works. It is also capped though, don't forget.

And this attitude is why the cliff edge is still in place. Because people tend to simply adopt the "you earn loads, no sympathy from us" mentality. I appreciate its a lot of money, and I'm extremely fortunate to receive that pay... but countless economists have provided research and reports to explain how this cliff edge is (i) reducing growth and incentive to work; (ii) actually reducing the tax take for the government. If they removed the cliff edge and sudden loss of childcare (which is the real kicker, and worth more than the personal allowance for a lot of folks) £100k+ earners wouldn't be shoveling great sums into a pension, they'd just be taking the usual 40% hit on it - hence, the public purse starts collecting 40% of £100k+ instead of the big fat £0 it usually gets at the moment. It's a total own goal, but is politically hard to change because of the "my heart bleeds" mentality.

Does your pension provider give you tax relief at the basic rate? If so you can also add on the grossed up amount.

Since someone can make extra salary sacrifice and still take home a good £5,700 a month and receive tax free childcare, I’m not sure there will be much sympathy around these parts.

@Didimum Yes, I know its net adjusted, which I why I mentioned that to try and mitigate some of these issues I contribute more to my pension (i.e., to reduce my net adjusted income to under £100K). But it's very easy to say, and a lot harder to do in practice given I kind of need that money now whilst life is the most expensive it will ever be for me (again, as I said big mortgage, cost of young kids and childcare etc.),

People at the top and bottom of the higher rate bracket don't pay anything like the same percentage of their salaries in tax.

At the bottom of the bracket, an employee earning £50271 per annum with no pre-tax deductions pays £7450 tax and £3016 national insurance (which is just a tax), which totals 20.8% of their gross pay.

At the top of the bracket, an employee earning £125140 per annum with no pre-tax deductions pays £42516 tax and £4513 national insurance, which totals 37.6% of their gross pay.

At the top of the bracket the total tax rate is much higher, 16.8 percentage points or 81% higher than it is at the bottom.

What scenario are you talking about whereby you’d be looking at maxing out your pension contributions? To stay below £100k net adjusted income?

You’re only (“only”) paying 40% over the portion over £50,271(?) though, so if you earn £55,000 you’re paying 40% of £5k not 40% of the entire wage. I do agree though that 20% to 40% is a big jump, why is there not a 30% band 🤷🏼‍♀️

I agree that the 40% band is huge and the £100K cliff edge is a killer, especially if you have children. £100K is a good salary ofc, but it won’t go far in many cities.

Personally, I’d like to see the 40% band reduced to 30%, then a “super tax” or (say) 60% on those earning £1m+. I don’t think there will ever be much political will for that though.

Ah fair enough - I’m too old to have paid under the new system.

@LittleBearPad plus 9% student loan = 51%

They won’t be paying 50% tax, not least because there isn’t a 50% tax rate.

They may be paying 42% (40% plus 2% NI).

@Didimum it means if you want <£160k the only sensible thing to do is max out your pension contributions though.

Which… given the size of most people’s mortgages, isn’t the most sensible use of the money IMO.

Most expensive years of your life with countless competing financial objectives (90%+ mortgage probably being the big one), and you are… putting 40% of your income into a pension you can’t access for 20 years minimum.

The cut off for tax-free childcare etc is not really £100k since it’s net-adjusted income of £100k. You can be earning an awful lot more and still get it, even with bog-standard pension contributions. And in many pension situations (such as NHS) you can take off an extra 25% per £1 of pension contribution too.

You progressively lose the personal allowance over £100k, so £100k+ earners are paying more than £99k earners.

There aren’t enough people earning £100k+, OP. That’s why the bracket is that big.

Rest assured, people on £100k+ pay an awful lot of tax. I’m on £65k and my take home is about £45k a year. My DH is on £120k and take home is about £70k.

I don’t mean to be rude, but I don’t think you understand tax.
someone earning £125,000 will Pay a huge amount of tax.

Well that explains why you don't know that the 40% rate only kicks in on earnings above £37,700 when you earn over £125k (because those people have lost their tax-free allowance). For those earning under £100k the 40% band starts at just over £50k, and thete is tapered loss if the tax-free allowance between £100k and £125k. That's all before pension contributions, which will reduce everyone's income tax.

I don't know why HMRC quote the 40% tax band as starting at £37,700 without making it clearer that that means £37k PLUS whatever your tax-free allowance is!

I am a primary teacher and was at a course yesterday with high school teachers who were saying now that our salary has increased any extra exam marking they do is taxed at 50% resulting, understandably, in a huge shortage of people willing to do it. There must be lots of similar examples putting people off doing extra work.

Seems like they need to increase the £50k threshold as that's not a high warning salary any longer.

You’re still wrong

What, therefore, is the incentive for people to be driven to progress their careers into higher pay brackets, given that they reap just over half the financial reward. That seems inordinately skewed from a system perspective.

Well.... as someone in that bracket I do often wonder wtf I'm bothering for! My situation is made worse because I have 2 young kids. Over £100K means I:

• Lose personal allowance, so they claw it back through addition tax between £100K-£125 so its about 60% tax deduction;
• Get no child benefit (I don't mind this tbh)
• Lose ability to claim tax-free childcare
• Lost my funded childcare hours, which are worth a really good amount of £ per year.

Over £125K you enter into Additional Rate band too, which means 45% tax. Also, you lose any savings allowance too, so you're taxed 45% on any interest you make in any savings accounts too... just for good measure!

I have been trying to put money into my pension to mitigate some of the above, but its not always that simple. We're at a stage in life where things are probably the most expensive it'll ever be - big mortgage, high childcare costs etc. - so we kind of need some of that cash now, rather than lock it away until we're 60. As a result we just have to take the tax hit on a lot of it.

And don't get me started on the fact that loss of funded childcare hours is based on only one parent going over £100k, whereas two parents could earn £99,999 and get all the hours! If there has to be a limit then it should be (a) tapered like child benefit; and (b) calculated on household income rather than one parents' income.

Oh for goodness sake. You're only taxed at 40% on every pound above the threshold. So no, it's not unfair. You're still paying a lower average rate than people earning at the higher end of the band, because a bigger portion of their overall pay is taxed at the 40% rate.
I've been at the lower end of the 40% bracket almost all my working life, I recognise that earning that much is actually a privilege, compared with what most people earn, and I'm proud to be playing my part funding public services.

this is a helpful easy to understand website
How Income Tax and the Personal Allowance works | MoneyHelper

But then you can take out up to 25% tax free at age 55 (or 57 from 2028 - thanks Rachel Reeves!) - if your employer does pension contribution matching then its a no brainer :-)

OP your figures are wrong. Others have given you the correct ones

Because the Gov wants more people in the 40% bracket, that's why they haven't increased it